Jun 15, 2021 - Mar 31, 2023

Unveiling the Technique Effect: Carbon Taxes and Innovation

This proposed research project is an extension of my research project, “Carbon Taxes and Competitiveness,” funded by the GRIPS research center during the 2019-2020 period. We find that firms reduce emissions by lowering their emission intensity in response to a carbon tax. This means that firms are being innovative and investing in technologies that allow them to produce more with less fossil-fuel-based energies. We claim that this particular response may be unique to the “revenue-neutral” carbon tax, which uses the carbon tax revenues to lower the rates of other distortionary existing taxes. We ask, “How do carbon taxes spur innovation, and what types of innovation do they encourage?” We investigate further the mechanisms behind how firms are improving their emission intensity in response to the carbon tax. Proving evidence-based answers to these questions deepen our understanding of the emission reduction mechanisms through carbon pricing policies. Focusing on the British Columbia case provides us a unique opportunity as this policy is the only revenue-neutral carbon tax implemented in the world. Thus, it helps us guide on how to design a carbon pricing policy so that it achieves the emission-reduction goal at the lowest economic costs. Ultimately, the insights of this project will help many jurisdictions including Japan to better implement a carbon pricing policy in the future.